Federal student loan defaults increased dramatically last year as borrowers continued to struggle to repay their loans in a tough economy, said James Kvaal, U.S. deputy under Secretary of Education Arne Duncan, in a press call Monday.
According to the Education Department’s official 2009 fiscal year national student loan cohort default rate, borrowers of federal student loans defaulted at higher rates in all sectors.
This was especially true in the for-profit sector, which had more than twice the default rate of public institutions and more than three times the default rate of private institutions.
Overall, the national student loan default rate increased 20 percent from 2008 — from 7.0 percent to 8.8 percent — while default rates increased 17 percent at public institutions from 6 percent to 7.2 percent, and 13 percent at private schools, from 4 percent to 4.6 percent.
The White House Media Affairs Office said the rates announced represent a “snapshot in time,” with the fiscal year 2009 cohort consisting of borrowers whose first loan repayments came due between Oct. 1, 2008 and Sept. 30, 2009, and who defaulted before Sept. 30, 2010.
More than 3.6 million borrowers from 5,900 schools entered repayment during this window of time and more than 320,000 defaulted. Those borrowers who defaulted after the two-year period are not counted as defaulters in this data set, the media affairs office said.
The department has noticed two trends in data that have accounted for the increases.
“The first is a struggling economy,” Kvaal said. “The economic problems in this country have made it hard for students to pay back loans on strict budgets…We see a strong relationship between student default rates and unemployment rates.”
The growth of for-profit colleges is another factor. At for-profit schools, the default rate swelled to 15 percent from 11.6 percent, an increase of nearly 30 percent.
Student loan default rates in 2009 were the highest in 12 years, when they were also 8.8 percent, but were still less than half the peak rate of 20 percent recorded in 1990.
Federal spending on college grants and subsidies increased under the current administration as well.
The Cohort Default Rate is one measure of how well a school prepares its students for student loan repayment. Low rates signify schools are counseling their students to borrow as needed, stay aware of their repayment obligations and understand the consequences of default.
High rates might indicate schools need to better support their borrowers with repayment information and resources to improve understanding among students.
Schools with excessive default rates might lose eligibility in one or more federal student aid programs, the White House said.
This year, five schools are subject to sanctions for cohort rates that either exceeded 25 percent for three consecutive years or exceeded 40 percent in the latest year or both.
Four are proprietary schools: Tidewater Technical, Norfolk, Va.; Trend Barber College, Houston; Missouri School of Barbering & Hairstyling, St. Louis; and Sebring Career School, Houston .
The fifth school is a private school: Human Resource Development & Employment — Stanley Technical Institute, Clarksburg, W.Va.
The Department of Education discussed steps it has taken to help students manage their debt and ensure taxpayer funds are being used well.
“We take this very seriously,” Kvaal said. “College can be one of the best investments of a lifetime.”
One of those efforts has been expanding The American Opportunity Tax Credit. The department is already seeing improvements and expects the expansion will continue to ease the process for students in paying back income-based repayments.
The American Opportunity Tax Credit provides credits of $2,500 per student annually, while the cash award for the Pell Grant increased by several
hundred dollars.
“These hard economic times have made it even more difficult for student borrowers to repay their loans, and that’s why implementing education reforms and protecting the maximum Pell Grant is more important than ever,” U.S. Secretary of Education Arne Duncan said in a statement.
“We need to ensure that all students are able to access and enroll in quality programs that prepare them for well-paying jobs so they can enter the workforce and compete in our global marketplace.”
Russel Throe, a senior at Eastern Michigan University, stated students are reminded frequently about payment deadlines.
“Its really not a struggle,” Throe said. “The school sends you emails directly to your emich account to remind you when to pay. Unless you don’t check your emich account often, or don’t have the money at the time, there really isn’t an excuse not to pay it off.”
To further assist students, the Office of Financial Aid offers an option called, Electronic Debit Account. Loan payments are withdrawn from back accounts automatically and always paid on time. Students don’t have to write checks every month and receive a reduced interest rate (.25 percent) during every semester this option is used.
The Department of Education will begin measuring default rates using a three-year cohort default rate next year. Kvall said the three-year window offers a more comprehensive and realistic scheme of borrowers in default.
